Hurricanes and financial models

All models are wrong but some are useful

Hurricane Irma is bearing down on the Caribbean and parts not fully known yet of the Southeastern US. Computer models are furiously forecasting its potential path.

The graphic above is a stark reminder of statistician George Box’s famous quote, “all models are wrong, but some are useful.”

For the people in Florida, the implications are clear: it’s likely that some parts will be hit. How hard and exactly where is still to be determined, but preparations are critical because of the risks.

Translate that into what it means to have a financial model for your business.

When you’ve gone through all of the effort to assemble a detailed spreadsheet that shows the interplay of revenue and expenses, marketing programs and customer acquisition, cost of goods and inventory, accounts receivable and cash, you have something that is wrong about the future. But if done well it’s going to be useful.

With that model you can run through various scenarios and see if the equivalent of a hurricane – running out of cash – is heading your way. You can start to prepare if you see the possibility.

That’s useful.

 

Don Gooding

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